Thursday, 08 April 2010 04:41

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture

From Banks, Brokers, & Bullsh1+ part 1:

A thorough forensic analysis of Goldman Sachs, Bear Stearns, Citigroup, Morgan Stanley, and Lehman Brothers has uncovered...

Let’s get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying “How the hell did he know that?”

The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain’t so and I’m not going to lie to you. The truth of the matter is I sniffed these incongruencies out because  2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating “This time is different”, “There is a new math” (as if there was something wrong with the old math), etc. and so on and associated bullshit.


So, the question remains, why is it that a lowly blogger and small time
individual investor with a skeleton staff of analysts can uncover
systemic risks, frauds and insolvencies at a level that it appears the
SEC hasn’t even gleaned as of yet? Two words, “Regulatory Capture”. You
see, and as I reluctantly admitted, it is not that I am so smart, it is
that the regulator’s goals are not the same as mine. My efforts are
designed to ferret out the truth for enlightenment, profit and gain.
Regulators’ goals are to serve a myriad constituency that does not
necessarily have the individual tax payer at the top of the heirachal
pyramid. Before we go on, let me excerpt from a piece that I wrote on
the topic at hand so we are all on the same page: How
Regulatory Capture Turns Doo Doo Deadly

First off, some definitions:

  • The Doo Doo, as in the Doo
    Doo 32
    A  list of 32 banks that I created on May 22, 2008 which set the stage for my investment
    thesis of shorting the regional banks. At that time, I was one of the
    very few, if not one of the only, to warn that the regional banks would
    hit the fan.
  • Regulatory capture (adopted from Wikipedia): A
    term used to refer to situations in which a government regulatory
    agency created to act in the public interest instead acts in favor of
    the commercial or special interests that dominate in the industry or
    sector it is charged with regulating. Regulatory capture is an
    explicit manifestation of government failure in that it not only
    encourages, but actively promotes the activities of large firms that
    produce negative externalities. For public
    choice theorists
    , regulatory capture occurs because groups or
    individuals with a high-stakes interest in the outcome of policy or
    regulatory decisions can be expected to focus their resources and
    energies in attempting to gain the policy outcomes they prefer, while
    members of the public, each with only a tiny individual stake in the
    outcome, will ignore it altogether. Regulatory capture is when this
    imbalance of focused resources devoted to a particular policy outcome
    is successful at “capturing” influence with the staff or commission
    members of the regulatory agency, so that the preferred policy
    outcomes of the special interest are implemented. The risk of
    regulatory capture suggests that regulatory agencies should be
    protected from outside influence as much as possible, or else not
    created at all. A captured regulatory agency that serves the interests
    of its invested patrons with the power of the government behind it is
    often worse than no regulation whatsoever.

About a year and a half ago, after sounding the alarm on the
regionals, I placed strategic bearish positions in the sector which
paid off extremely well. The only problem is, it really shouldn’t have.
Why? Because the problems of these banks were visible a mile away. I
started warning friends and family as far back as 2004, I announced it
on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be
ready to collapse some time soon. Most investors and pundits won’t
realize it because a) they don’t read BoomBustblog, and b) due to
regulatory capture, the bank has been given the OK by its regulators to
hide the fact that it is getting its insides gutted out by CDOs and
losses on loans and loan derivative products. Alas, I am getting ahead
of myself. Let’s take a quick glance at regulatory capture, graphically
encapsulated, then move on to look at the recipients of the Doo Doo
Award as they stand now…

A picture is worth a thousand words…


So, how does this play into today’s big headlines in the alternative,
grass roots media? Well, on the front page of the Huffington
and ZeroHedge, we have a damning expose of Lehman
(we told you this in the first quarter of 2008, though),
detailing their use of REPO 105 financing to basically lie about their
liquidity positions and solvency. The most damning and most interesting
tidbit lies within a more obscure ZeroHedge article that details
findings from the recently released Lehman papers, though:

On September 11, JPMorgan executives met to discuss significant
valuation problems with securities that Lehman had posted as collateral
over the summer. JPMorgan concluded that the collateral was not worth
nearly what Lehman had claimed it was worth, and decided to request an
additional $5 billion in cash collateral from Lehman that day. The
request was communicated in an executive?level phone call, and Lehman
posted $5 billion in cash to JPMorgan by the afternoon of Friday,
September 12. Around the same time, JPMorgan learned that a security
known as Fenway,which
Lehman had posted to JPMorgan at a stated value of $3 billion, was actually asset?backed
commercial paper credit?enhanced by Lehman (that is, it was Lehman,
rather than a third party, that effectively guaranteed principal and
interest payments)
. JPMorgan concluded that Fenway was worth
practically nothing as collateral.

Hold up! Lehman was pledging as collateral allegedly “investment grade”,
“credit enhanced” securities that were enhanced by Lehman, who was
insolvent and in need of liquidity, itself. For anybody who is not
following me, how much is life insurance on yourself worth if it is
backed up by YOU paying out the proceeds after you die bankrupt? Lehman
was allowed to get away with such nonsense because it was allowed to
value its OWN securities. Think about this for a second. You are in big
financial trouble, you have only a $10 bill to your name, but your
favorite congressman (whom you have given $10 bills to in the past) has
given you the okay to erase that number 10 on the $bills and put
whatever number on it you feel is “reasonable”. So, when your creditors
come a callin’ , looking for $20 in collateral, what number would you
deem reasonable to put on that $10 bill.

Ladies and gentlemen, in the short paragraph above, we have just
encapsulated the majority of the mark to market argument. Let’s delve
farther into the ZH article:


By early August 2008, JPMorgan had learned that Lehman had pledged
self-priced CDOs as collateral over the course of the summer. By August
9, to meet JPMorgan’s margin requirements, Lehman had pledged $9.7
billion of collateral, $5.8 billion of which were CDOs priced
by Lehman
, mostly at face value. JPMorgan expressed
concern as to the quality of the assets that Lehman had pledged and,
consequently, Lehman offered to review its valuations. Although JPMorgan
remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that
it had no other collateral to pledge.
fact that Lehman did not have other assets to pledge raised some
concerns at JPMorgan about Lehman’s liquidity


Hmmm!!! Three day old fish has a fresher scent, does it not? So where
was the SEC, the NY Fed, or anybody the hell else who’s supposed to
safeguard us against this malfeasance? Even bloggers picked up on this
months before it collapsed. The answer, dear readers: REGULATORY

Again, from ZH:


The SEC was not aware of any significant issues with Lehman’s liquidity
pool until September 12, 2008, when officials learned that a large
portion of Lehman’s liquidity pool had been allocated to its clearing
banks to induce them to continue providing essential clearing services.
In a September 12, 2008 e?mail, one SEC analyst
wrote: Key point: Lehman’s
liquidity pool is almost totally locked up with clearing banks to cover
intraday credit ($15bnjpm, $10bn with others like citi and bofa).
withThis is a really big


BoomBustBlog featured several warnings starting January of 2008!

One would think that after all of this, the problem would have been
rectified. To the contrary, it has been made worse. Congress has
pressured FASB to institutionalize and make acceptable the lies that
Lehman told its investors, counterparties and regulators. That’s right,
not only will no one get in trouble for this blatant lying, the practice
is now actually endorsed by the government – that is until somebody
blows up again. At that point there will be a bunch of finger pointing
and allegations and claims such as “But who could have seen this

Do you not believe me, dear reader. Reference

About the Politically Malleable FASB, Paid for Politicians,
and Mark to Myth Accounting Rules
: the nonsense is unfolding and
collapsing right now, even as I type this sentence.

The next place to look??? Who knows? Maybe someone should take an An
Independent Look into JP Morgan
.. or maybe even an unbiased
gander at Wells Fargo (see

The Wells Fargo 4th Quarter Review is Available, and Its a
. After all, If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear

More on Lehman Brothers Dies While Getting Away with Murder: Introducing Regulatory Capture:


  1. ZeroHedge Asks the Tough Questions of BofA and Repo 105s, Inquiring Minds Want to Know

  2. When the Patina Fades... The Rise and Fall of Goldman Sachs???

  3. Is the Threat to the Banks Over? Implied Volatility Says So

  4. 10 Ways to say "No, the Banks Have Not Paid Back Their Bailout from the Taxpayer!"

  5. To Bonus, or Not to Bonus? That is the Question

  6. Reggie Middleton on JP Morgan's "Blowout" Q4-09 Results

  7. The Morgan Stanley Q1 Outlook

  8. Doesn't Morgan Stanley Read My Blog?

  9. The Fed Believes Secrecy is in Our Best Interests. Here are Some of the Secrets

  10. Why Doesn't the Media Take a Truly Independent, Unbiased Look at the Big Banks in the US?

  11. As the markets climb on top of one big, incestuous pool of concentrated risk...

  12. Any objective review shows that the big banks are simply too big for the safety of this country

  13. The ARE trying to kick the bad mortgages down the road, here's proof!

  14. Why hasn't anybody questioned those rosy stress test results now that the facts have played out?

  15. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?

  16. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan

  17. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank

  18. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo

  19. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 5 - PNC Bank

  20. The Next Step in the Bank Implosion Cycle???

  21. A Must Read:An Independent Look into JP Morgan.This contains the "public preview" document (JPM Public Excerpt of Forensic Analysis SubscriptionJPM Public Excerpt of Forensic Analysis Subscription2009-09-18 00:56:22488.64 Kb), which is free to download.

  22. File IconJPM Report (Subscription-only) Final - Professional

  23. File IconJPM Forensic Report (Subscription-only) Final- Retail

Last modified on Wednesday, 27 July 2011 10:21

1 comment

  • Comment Link Reggie Middleton Friday, 09 April 2010 19:49 posted by Reggie Middleton

    Hello again,

    After re-reading my post to you yesterday, I see where it could’ve come off a bit preachy. While I did rant, maybe I did not put enough emphasis on the fact that I’ve liked your work in the past, I like the work you’ve continued to do, and I will continue to read things that you write. You do GOOD WORK! Very good work. …and I doubt your seeking my approval. …but I’m giving it anyway.

    My only problem was based on my opinion of prophetic claims. Where you may argue that you’re not claiming to be prophetic, but rather just logical, I, “The reader”, read it differently. (So take my “readers” complaint and toss it in the garbage if you like. I thought it to be constructive. Like I said; I like your work and not the claims, and can’t help but think that if I read it this way… others may read it that way too??? So I’m sorry if it offended you, it was not meant to.)

    My reasoning for even going down this path is because I have had threaded discussions with you that go back a few years. You can argue till your blue in the face, that you may have been the first to make some of your claims, while I would say that those threads from a couple of years ago, were the information superhighway for new and creative thoughts. Unbeknownst to many other bloggers on that superhighway, was that there were some pretty high end economists and financial engineers lurking. Many of those bloggers fed off of each other, and that’s where 99.9% of the construction took place.

    It was that collective that shone a light on this whole charade. It wasn’t me. It wasn’t you. It wasn’t Roubini. (well some was Roubini). …but rather it was the collective. …and I remember quite specifically the way you or I or many others would write something…. …and then it would go through the grinder of that blogging network. …and after about 2 days, and 2,000 eyes and opinions… new dots were connected. You were in that community, and part of that collective. …and I don’t think that I or you deserve any credit for that genius that was displayed. …but rather the collective that deserves the credit.

    Kudos for being there. …but I’m sorry if I offend you in saying I don’t think any of us “individuals” that were there deserve credit for it. To me, it just seems like pinning your name to a claim that was part of a collective is an attempt to cash in. My personal route, (had I decided not to quit writing and sharing my analysis) would be to just keep doing my good work. (…and not looking for credit for something that was grander then just an individual’s idea)

    I could be right or wrong, but I always assumed your background was in ComRe, since you did do some of the better early research in this area ahead of most of the collective. (but we all know what assuming gets us.)

    Enough form me.
    All the best, and keep up the good work,
    Miss America – Rich Hartmann
    @ Macfly, as you can read, I kinda stepped back from the game. I still create my models, and play with analysis, but I no longer like to put too much effort into it. To me, it’s like trying to have a serious discussion about who’s a better wrestler: Hulk Hogan or Rick Flair. You can come up with a thousand arguments for one or the other… and then you remember… It’s all FAKE. Yes, the blood is real, and bones do break, but the outcome is predetermined. I’ll probably rejoin the community and share my analysis when I believe the venue has cleaned up its act.

    Oh... p.s. Reggie. Check out Q/E & overnight rates, with reklation to "DFCI" (Unscramble the quotes) You'll find some answers here. ...and I haven't seen WSJ or anyone else figure this out yet

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